Economics Essay Example | Topics and Well Written Essays - 3500 words

Economics - Essay ExampleThe policies down the stairstaken by governments in different economies are highly influenced by his theories even today. The theories introduced by Keynes mainly concentrate in the character of total spending in the economy. The theories also analyze the influence of aggregate demand in economies swelling and output level. According to Keynes the aggregate demand created in the economy is often not equal to the amentiferous capacity of the economy. Keynesian theories were introduced during Great Depression in the economy. Keynesian theory supports a mixed scotch system, where the main sectors of the economy are headed by private business entities but are guided under the rules and regulations of the government at times of recession (Keynes, 1979). New Classical Theories of Economics New Classical theories of political economy are consisted with the scotch views of the modern contemporary economists. The theories mainly concentrate in the scathe, output and determination of income dissemination in the economic system. The conjectures focus on the free forces of market demand and supply in the economy. These theories exempt the idea of rational economic behaviour. Maximization of consumer utility subject to budget constraints or maximization of producers amplification subject to cost constrains are theories of neo classical economics. It assumes that economic entities in the world undertake their economic decisions after getting equipped with the underlying relevant information. Neo Classical theories of economics dominate the Keynesian views economics (Arnold, 2008). Aggregate Supply Curve The aggregate supply disregard (AS) shows the different levels of Gross house servant Product (GDP) in real terms, generated at changed levels of prices in a particular period of time. The curve shows the congeneric between price and real GDP, assuming all other factors affecting real GDP invariable (Ceteris Paribus assumption). The Keynes ian and Neo Classical views regarding the shape of the AS curve are contrasting. Keynesian AS curve Keynesian theory was introduced during the Great Depression when the economy was under strict recession. Due to recessionary trends in the market most of the resources were ideal and insensitive in the economy. Thus Keynesian theory firmly believed in the rigidity of price and wage rates in the economy. Keynesian theory is consistent with a crosswise AS curve where any changes in the real GDP are caused simply due to changes in the aggregate demand (AD) in the economy. It was analyzed by Keynes theory that only changes in the aggregate demand, could meliorate the state of a depressed economy. Figure 1 - Keynesian Horizontal AS curve consumer price index AD p AS q Real GDP (Source Authors Creation) The graph above illustrates the AD and AS curve in Keynes views. The consumer price index (CPI) is the average price level of all the goods and work produced in the economy. AD is invers ely proportional to CPI as per the law of demand. The market equilibrium price (p) and equilibrium quantity (q) of real GDP generated in the economy are determined from the point of cross between the AD and AS curves. Rise in Government Spending Impact In pitch to improve the aggregate income level in the economy the government undertakes expansionary fiscal policies. These policies